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TMI Blog2009 (1) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of." 3. The facts relating to first ground are that the assessee is engaged in manufacture and sale of leather goods, shoe upper, soles, etc. On scrutiny of the P L a/c of the assessee by the AO it revealed that the assessee has claimed an expenditure of Rs. 3,86,63,896 on account of loss due to irrecoverability of direct loan as also loan amount for the execution of standby letter of credit (including charge on it) paid to the wholly-owned subsidiary (in short 'WOS') company in USA. The AO called for the explanation relating to this loss, since the loss does not spring from assessee's business. The assessee submitted before the AO that it is a business loss incurred on account of commercial expediency to be allowed as business loss. The AO was of the opinion that the main object of the assessee is to manufacture and sale of leather, leather goods and footwears and shoe uppers and granting of loans to its subsidiary or standing guarantee for any company including its subsidiary is not the business of the assessee company. Further, there is no agreement stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the transaction of guarantee cannot be said to have been given in the course of the assessee's business as a financier and, therefore, it has to be held that the deduction claimed is not a business loss or a bad debt arising out of the assessee's business." Further, he relied on the judgment of Hon'ble Madras High Court in the case of K.S. Janakiram vs. CIT (1962) 45 ITR 430 (Mad), wherein it was held as follows: "In that case a freight broker guaranteed a loan of a charter to a shipping line as part of a transaction of charter party. Share of profits from the shipping line (borrower) was the consideration. The shipping line was not able to repay the loan. The result was that the broker had to discharge the loan as a guarantor. He, thereafter, wrote off the amount in his accounts and claimed it as a bad debt. When the matter came to this Court, this Court held that no part of the sum which was guaranteed by the assessee could be treated as a bad debt as furnishing of guarantee is not a normal incident in the course of business of freight brokerage and it is also not customary for freight brokers to undertake such an obligation on behalf of shipping lines. The Court was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larger interest of the assessee's business that the guarantee was given. In our opinion, the view of the Tribunal was based on a complete misapprehension of the true legal position. The High Court also fell into the same error. The allowance which was claimed did not fall within s. 10(2)(xi). No attempt was made nor indeed could it be usefully made to claim any allowance under s. 10(2)(xv) of the Act." Further, he relied on the judgment of Hon'ble Calcutta High Court in the case of Rampooria Brothers (P) Ltd. vs. CIT (1987) 59 CTR (Cal) 243 : (l987) 167 ITR 859 (Cal), wherein it has been held as under: "On a consideration of the facts and circumstances of the case, the submissions on behalf of the parties and the decisions cited, it appears to us that the Tribunal had sufficient evidence before it to come to the conclusion that the guarantee furnished by the assessee was not a normal business transaction of the assessee and that the same had been furnished on extra commercial considerations. These findings have not been challenged specifically by the assessee. No doubt, the Tribunal has not scanned the relevant clause in the memorandum of association properly or with care as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectly springing from its business activity and the connection could not be considered too remote for the purpose of the allowance as a trading debt. The test and the approach to be applied in this case must be that of a businessman. (iii) CIT vs. F.M. Chinoy Co. Ltd. (1969) 74 ITR 780 (Bom), wherein it has been held that mere fact that cl. 13 of the managing agency agreement was so worded as to make it only optional on the part of the assessee to make the advances is not a ground for holding that the amount was not a loss in the course of business. When a loss incidental to business is allowable, and in this case the loss is incidental, the absence of an obligation does not affect the claim. (iv) CIT vs. A. Gajapathy Naidu (1964) 53 ITR 114 (SC), wherein it has been held as under: "Held, that the amount ought to be included in the profits of the year 1950-51 relevant to the asst. yr. 1951-52, and that it could not be related back to the earlier year during which the assessee actually supplied bread to the hospital." (v) CIT vs. Swadeshi Cotton Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC), wherein it has been held as under: "Held, that it was only in 1949 that the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced cannot be said to have indirectly facilitated the carrying on of the assessee's business nor can it be said that during the year in the larger interest of assessee's business that the guarantee was given. Bad debts on this account cannot be allowed. 5.1 Further, she submitted that it is a capital loss and not a trading loss. The capital loss cannot be allowed as deduction. She submitted that s. 37 of the IT Act does not permit the allowability of capital expenditure or the personal expenses as a deduction while computing the income under the head of profits and gains of business or profession and the expenditure laid out and expended wholly and exclusively for the purpose of business shall be allowed as a deduction. She drew our attention to letter dt. 10th July, 2008 written by the AO to the CIT(A), which reads as follows: "The CIT(A), Jalandhar. Sub: Appeal No. 380/200-8-M/s Swarup Tanneries Ltd.-Asst. yr. 2005-06-Regarding. Kindly refer to your office letter No. 89, dt. 6th May, 2008 forwarding therewith submissions of the assessee company on the issue of additions made at the time of assessment. 2. After going through the submissions and the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses indirectly assist the company in the control or the development of its business and properties or incurred in connection with any such promotion or incorporation and remunerate any person or company in any manner it shall think fit for services rendered or to be rendered to the company in or about the conduct of its business. 6.1 Further, he relied on the judgment of Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT, wherein it has been held that the expression "commercial expediency" is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency and it is immaterial if a third party also benefits thereby. 6.2 Further, reliance was made on the judgment of Hon'ble Bombay High Court in the case of CIT vs. Investa Industrial Corporation Ltd. (1979) 119 ITR 380 (Bom), wherein it was held as under: "Once the advances are held to have originated in carrying on the business of the assessee, the dissociation of the assessee from the managed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee company made entire investment in the WOS and the financial statement of the assessee not only reflected the assets and liabilities and profits but also assets and liabilities and profits of the WOS. It has close business connection with the assessee company and the assessee company is a proprietary concern of the subsidiary company and the entire advance made by the assessee company to WOS is for the purpose of business. Further, he submitted that there may not be any agreement with the WOS that the assessee and assessee company discharged its duties for standing a guarantee for the arrangement of the finance for the WOS as no monetary consideration is required for the same and the only consideration is manufacturing of the shoes/shoe uppers for the customers of the assessee company in USA. Further, he submitted that the agreement need not be in writing only and even oral agreement will serve the purpose. He submitted that it is the liability of the assessee company being holding company to provide finance to its subsidiary company. The assessee has only one subsidiary company and the assessee has advanced money to that company and it has no occasion to advance any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company while carrying on the business other than finance to the subsidiary company, it is not given in the course of assessee's business, as there is no privity of the contract or any legal relationship between the assessee and such subsidiary company as trade debtor and creditor. There was neither any custom nor any statutory provision or any contractual obligation under which the assessee was bound to guarantee the loan advanced by other party to the subsidiary company. Hence, the amount that had to be paid by the assessee when it become irrecoverable, it did not fall within s. 36(2) of the Act. Reliance is also placed on the judgment of Hon'ble Supreme Court in the case of CIT vs. Birla Bros. (P) Ltd., wherein the facts of the case are that the respondent, a private company, carried on the business of banking and financing and also of managing agency. Starch Products Ltd. was one of the various companies managed by the respondent. Starch Products Ltd. had appointed a selling agent and the respondent stood guarantee for a loan of Rs. 6 lakhs which was advanced by a bank to the selling agent of the managed company. The selling agent failed to pay the loan which at the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its own business but arose because of the business of another person and it was, therefore, not a permissible deduction under s. 10(1) of the IT Act. It was not a loss which had to be deducted in respect of the business of the respondent firm from the profits and gains of the business." 7.1 The amount paid by the assessee was not debt in ordinary course of business and cannot be allowed as a deduction. Reliance is placed on the judgment of Hon'ble Supreme Court in the case of Indian Aluminium Co. Ltd. vs. CIT (1971) 79 ITR 514 (SC), wherein it has been held that irrecoverable amount of tax paid on behalf of foreign collaboration (to whom payment was made without deduction of tax at source) written off in the books of assessee cannot be allowed bad debt arising out of the business of the assessee. 7.2 Further, a debt can be incidental to the business only, if it arises out of transaction, which was necessary in furtherance of the business and was within the range of business activity. Everything associated or connected with the business cannot be said incidental thereto. Not merely should there be a close proximity to the business, as such, but it should also be an integral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. The advance in the field of investment filed for the purpose of securing source of income and not for the purpose of earning income. In other words, the source of income is not synonymous to the income. In order to entitle deduction it should have been incurred in the course of carrying on the business and it should be in the nature of revenue loss. In the present case, debt claimed as bad debt is not a trading debt emerged from the trading activity of the assessee. The debt arises out of investment activities of the assessee and that is in the capital field, not on account of revenue, cannot be allowed as a bad debt. 7.4 The learned counsel for the assessee relied on the judgment of Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT. That judgment is relating to the allowing of interest on the borrowed capital lent to the sister concern. The Hon'ble Supreme Court held when the assessee borrowed funds and lent to the sister concern, the interest on that borrowed funds is allowable as business expenditure, since the amount lent to the sister concern is commercial expediency. The issue before us is not relating to the allowability of interest on bur-rowed funds. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Corporation Ltd., the Hon'ble Himachal Pradesh High Court has held as under: "Held, that once a company had been ordered to be wound up, there was no question of any party dealing in the shares of that company. The Tribunal had come to a finding that the shares were stock-in-trade and had therefore, allowed the loss. The loss had to be treated as a trading loss. The mere fact that the shares were not sold was of no significance since in fact the shares could not have been sold and had become worthless." In that case, shares are held by the assessee as stock-in-trade. Hence, the loss of the trading asset is to be treated as trading loss. In the present case, the debt was incurred as an investment which is in the capital field, hence, this judgment is not applicable. 7.8. In the case of ITW Signode India Ltd. vs. Dy. CIT, the Tribunal Hyderabad Bench, has held that that ICD placed with SW was (sic-not) for some personal reasons. Inter-corporate deposits are quite common and corporate houses accommodate each other on short-term basis on grounds of commercial expediency. Today, if the assessee accommodated SW, tomorrow, it could be SW accommodating the assessee. Moreover, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 37 of the Act and as it is not trading loss. Further, the AO had also taken up this issue before the CIT(A) vide his letter dt. 10th July, 2008, reproduced at para 5.1 of this order and CIT(A) having co-terminus jurisdiction with AO could have decided the issue, which he failed to do so. 8. As seen from the above discussion, the impugned amount not being an advance in ordinary course of business, nor being the trade debt and debt incurred in the capital field for the purpose of earning the source of income and the debt has fallen on the shoulders of the assessee because of the failure of the subsidiary company and that debt cannot be allowed as deduction while computing the business income of the assessee. The same thing is applicable to loan amount for the execution of standby letter of credit laid to the WOS. 9. Even otherwise, the loss does not pertain to asst. yr. 2005-06. As per letter of the RBI, dt. 6th Oct., 2003, it was directed to write off investment in the asst. yr. 2004-05. For clarity, we reproduce the letter issued by the RBI dt. 6th Oct., 2003: "M/s Sarup Tanneries Ltd., Dt. : 6th Oct., 2003 P.O. Ramdaspura, Jalandhar 144003, Punjab. Dear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, it is utmost necessary to claim expenditure of a particular year in that assessment year only. It is an admitted fact that the assessee even did not make any provision for this expenditure in the assessment year in which it was incurred. Being not made provision for the expenditure in which it accrued, the payment of the expenditure in other assessment year cannot be allowed. In this legal background and accounting/framework, the assessee ought to have recorded the expenses in the relevant accounting year wherein liability to incur such expenses crystallised. As seen from the letter of the RBI for all reasons, the expenditure accrued in the asst. yr. 2004-05 since the letter dt. 6th Oct., 2003 was relating to the financial year 2003-04 relevant to the asst. yr. 2004-05. The liability is not settled vide RBI letter dt. 16th June, 2004 as observed by the CIT(A). In fact, neither party produced any letter dt. 16th June, 2004 but the assessee produced four letters in the paper book mentioned at pp. 10 to 14, viz., letter dt. 6th Oct., 2004, 15th Nov., 2003, 13 April, 2004 and 31st Jan., 2008. Out of this, letter dt. 6th Oct., 2003 which was reproduced earlier wherein RBI approve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue, cannot be allowed as a bad debt. Hence, the question of allowability does not arise. This ground of the Revenue is accordingly allowed. 10. The next ground is relating to allowance of car expenses at Rs. 1,00,000 and foreign travelling expenses at Rs. 86,183. The AO disallowed at 1/l0th of the expenses without pinpointing which expenses are in the nature of personal. On appeal, the learned CIT(A) deleted the addition. 10.1 We have heard both the parties and perused the material placed on record. We find that the AO has brought nothing on record to show which portion of expenditure is personal in nature, hence the disallowance is not justified. We confirm the order of the learned CIT(A) on this issue. The disallowance of Rs. 1,00,000 on account of car expenses has been made since the assessee has not maintained the log book. But, this is a case of limited company and there cannot be any personal expenditure in the hands of the limited company. Hence, the deletion made by the learned CIT(A) is justified. Accordingly, the order of the learned CIT(A) is confirmed. This ground of appeal of the Revenue is rejected. 10.2 As regards the ground relating to allowability of foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X
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